Buyside Wants More Transparency of Its Orders

Buyside traders are looking for increased transparency from their brokers about where their orders are routed and filled. They want that information as soon as possible and in an easy-to-use format.

This information, the buyside argues, is important because it gives them a leg up on determining the best places to trade for price and size in a fragmented market of multiple exchanges and 40 dark pools. So the sooner they receive this information, the sooner they can adjust strategies and routing for better trading results, they say.

Buyside traders expressed these views on order routing disclosure on a panel at last week’s Investment Company Institute’s conference on equity trading in New York. The sellside is providing the data the buyside wants, but not as fast as some on the buyside would like.

Making dark pool trade data available to the clients by the end of the week was desirable, economical and preserves market integrity, said Dmitri Galinov, who heads liquidity strategy at Credit Suisse’s electronic trading group, AES, and runs its Crossfinder dark pool.

However, Steve Sachs, director of trading at Diamond Hill Investments, a Columbus, Ohio-based investment firm with $7.9 billion in assets under management, said that asking for daily disclosure of trading and routing data is fair and reasonable. And to him, it didn’t matter whether a trade was executed in the lit or dark markets.

"I support end-of-day dark pool trade disclosures, too," Sachs said. The bottom line is he wants as much of his data as he can get, as quickly as he can get it.

Tracking orders can be an arduous and time-consuming task, the sellside counters. And getting data from all the trading venues can increase the likelihood of information leakage, which compromises brokers’ desire to maintain customers’ privacy.

Also, divulging to the buyside just how broker-dealer algorithms and other sellside technology decide how to execute an order could compromise proprietary information.

Matt Lyons, global trading manager at Capital Research and Management Company, which runs $900 billion for the American Funds, said he sees value in increased disclosure. Lyons said evaluating broker performance would be easier if they’d explain their technology a little more.

"I know it’s my obligation to understand my brokers’ routing practices, but brokers can help more," he said. "I don’t know what models they use" in determining whether his order goes into the lit or dark markets. "Maybe some of that [dark] order flow should have gone into the lit markets," he said.

And since the logic behind order routing is unknown, Sachs said that traders like him have no benchmarks to gauge whether a broker is acting in his best interest.

The debate brought up Regulation NMS, which in 2007 encouraged electronic trading and exacerbated the split of lit and dark markets. Panelists on both the sellside and buyside discussed Reg NMS and questioned the adequacy of rules 605 and 606, which govern the way market centers distribute trade execution data and order-handling procedures of brokers, respectively.

Some on the sellside and buyside question whether these rules go far enough, as they apply only to orders that have been filled. They wonder whether the rules are even useful in today’s fragmented marketplace or whether they need to be revised.

"Rule 605 is not helpful to me, and 606 is too ambiguous in how or what information is disclosed," Lyons said. That makes evaluating broker performance and determining whether brokers are acting in the buyside’s best interests problematic.
"We do ask for and get reports and try to determine if broker-dealers are working in our best interests," Lyons said. But sometimes the data and reports are not readily disclosed or distributed in an easily understood format. Some of the data he is looking for, like when and where brokers receive rebates, can help him determine if the brokers are meeting their best execution obligations.

Still the sellside said the complexity of the market structure makes this disclosure difficult. As Credit Suisse’s Galinov said, traders use many different order types and venues, and tracking them all could result in information overload. For example, the sellside has noted that using an algo to trade a single individual order for 100,000 shares could generate potentially tens of thousands of smaller "child" orders. And the process of keeping track of all that data and making sense of it is a large, technical task.

Sachs said rules 605 and 606, while both "good in spirit," are not sufficient in a fragmented market. The rules currently disclose only a handful of data points, such as where a broker executed a trade. New rules could include what type of order was used to execute a trade or what percentage of a trade was completed at a certain market center.

At the end of the day, commented Sachs of Diamond Hill, "We need more details due to the complexity of the market structure."